Value creation through mergers and acquisitions in South Africa

Abstract

Mergers and Acquisitions (M&As) is a topic that has been researched extensively globally since their inception, especially on their ability to create value for shareholders. However, many approaches prevail on how an acquisition or merger can generate value including synergies, improvements, and amplified market power, amongst others. Evidence from the stock exchanges shows that over 50% of mergers and acquisitions (M&A) fail to create value, some argue that only a third of acquisitions were able to create value while some found the success rate is about 20%. Given the contradictory findings and the unclear reasons on the variation in M&A performance across the world, this study adds to the literature of whether mergers and acquisitions of South African companies create value for shareholders by way of looking at acquirers and targets of JSE listed companies over the last two decades. The study looks at the short-term effects on value creation for shareholders during M&A announcements for acquirers and target shareholders by applying the event study methodology using the market model to see the abnormal returns upon the 21 days’ announcement period. The study further analysed the results by industry to establish which industries create the most value and which industries destroy value for shareholders. The results showed that both acquirers and targets do not earn statistically significant abnormal returns during the announcement period. When analysing the event study results by industry for acquirers, diversified industry M&As yield the most favourable results, followed by the consumer non-cyclical and communications industry; for targets, the consumer non-cyclical industry is most favourable followed by the communications and consumer cyclical industries respectively when comparing CARs, which concludes that the type of industry matters in value creation for both acquirers and targets in South Africa, similarly to other studies globally.